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Investors and businesses alike find themselves in a quandary understanding the dynamics of Rule 506, which was long the standard in the investment world. The rule offers an exemption to investors from the requirement of registering securities. Come 2013, a new rule was introduced - Rule 506(c), authorized by the JOBS Act (Title II), changing the landscape. With the old Rule 506 now rebranded as Rule 506(b), it's easy to get lost in the maze.
A new dawn of private investment opportunities was ushered when Rule 506(c) was adopted. It expanded the scope of investment advertising, allowing investors to advertise specific deals to private investors, provided they adhere to the new rules. If you're leveraging other people's money for your real estate transactions, you're more than likely dealing in securities like promissory notes or “investment contracts.” With this rule, these offerings can be advertised under certain conditions, opening up a new realm of possibilities.
Rule 506(b), originally known as Rule 506, is still operational and offers an unlimited fundraising opportunity from Accredited Investors and up to 35 Sophisticated Investors. However, no means of general advertising or solicitation can be used under this rule. Documentation of a pre-existing relationship with an investor is a must, a factor that has been a source of confusion and significant impediment, especially for small issuers trying to fund their real estate transactions or businesses.
For small issuers seeking to raise funds between $1 million to $10 million, Rule 506(c) presents an attractive solution. The rule permits advertising to anyone as long as only Accredited Investors are accepted in their offerings. However, issuers must demonstrate that they took “reasonable steps” to ensure that all investors are Accredited at the time of the investment. This verification may include income verification, asset and liability verification or obtaining a written confirmation from a credible authority like a securities broker-dealer, registered investment adviser, licensed attorney, or CPA.
With the implementation of Rule 506(c), a new Rule 506(d) was added to protect against fraudulent activities. It disqualifies persons who have been convicted of or are subject to certain legal sanctions, ensuring a safer investment environment.
The SEC has proposed additional amendments to Regulation D, including additional Form D filing requirements, filing of additional information about the issuer and marketing methods, and more. While these amendments are not yet implemented, voluntary compliance has been seen among issuers of Rule 506(c) offerings.
Understanding the requirements of Rule 506(c) is crucial if you decide to venture down this path. This rule allows you to advertise securities offerings to anyone, even on your own website, providing you take “reasonable steps” to sell the securities only to Accredited Investors. If you wish to include Sophisticated Investors in your offerings, Rule 506(b) remains your go-to. Either way, the world of securities offerings continues to evolve, offering new opportunities and challenges.